[T]he state of Vermont charged Ariel Quiros, Bill Stenger, and more than a dozen of their business entities with 15 violations of the state’s securities law and consumer protection law Thursday.
Susan Donegan, the commissioner of the Department of Financial Regulation, is seeking $185,000 in fines for seven alleged violations of the Vermont Uniform Securities Act and eight alleged violations of the Vermont Consumer Protection Act.
In addition to the statutory fines, the state wants the businessmen to disclose all of the money to the court that they obtained from investors; surrender the amount of money they obtained illegally, plus interest; pay restitution to all defrauded investors; and pay the state’s legal fees.
Vermont’s case says Quiros and Stenger “orchestrated a large-scale investment scheme to defraud investors” and “used multiple limited partnerships, limited liability companies and corporate entities they control to assist in carrying out the fraudulent scheme.”
The alleged scheme affected more than 700 investors who invested more than $350 million total. Of that total, $200 million was misused, including $50 million misappropriated in part for personal expenses, according to the lawsuit.
In addition to the statutory fines, the state wants the Jay Peak developers to disclose all of the money to the court that they obtained from investors; surrender the amount of money they obtained illegally, plus interest; pay restitution to all defrauded investors; and pay the state’s legal fees.
The state filed the case in the civil division of Washington Superior Court in Montpelier at 12:15 p.m. on Thursday. Attorney General Bill Sorrell said Thursday afternoon he has not decided to file criminal charges “but that could change.”
A federal complaint unsealed Thursday makes similar allegations in bringing 52 counts of fraud.
Acquisition of Jay Peak Resort
The development ideas that led to the alleged fraud date back in the mid-2000s, according to the lawsuit, when Stenger, who had been the chief executive officer at Jay Peak Resort for about 20 years, became friends with Quiros, who regularly vacationed in the area.
In 2006, Mont St. Sauveur International Inc., the longtime owner of Jay Peak Resort, wanted to become a four-season resort and began seeking $17.5 million from 35 investors for a two phases of a hotel project that eventually became known as Tram Haus Lodge.
In the fall of 2007, Quiros and Stenger started discussing how to acquire Jay Peak, the lawsuit says. Quiros took over functional control of Jay Peak in January 2008 and, according to the lawsuit, illegally used $21.9 million in investor money to pay for the resort.
Quiros started the company Q Resorts in February 2008, which would later become the owner of Q Burke. Quiros opened a bank account for Q Resorts at Raymond James Financial Inc. in Florida. The broker for the account was his former son-in-law, Joel Burnstein.
Between June 2008 and October 2008, Quiros used the account set up through his former relative to use Phase 1 and Phase 2 money from investors to buy Jay Peak, according to the lawsuit, even though lawyers told the parties they were not allowed to do that.
The lawsuit describes a series of financial transactions on June 23, 2008, that went like this: Ownership of two accounts containing investor money for phases 1 and 2 of Tram Haus Lodge was transferred to Q Resorts, and then $13 million was transferred from the Q Resorts accounts to Mont St. Sauveur.
“To complete the acquisition, Quiros made approximately eight additional payments between June 2008 and September 2008 to (Mont St. Sauveur) and its creditors with Phase 1 and Phase 2 investor funds that totaled over $8 million,” the lawsuit says.
The lawsuit says the agreements used to raise investor money for phases 1 and 2 of Tram Haus Lodge “did not disclose the purchase of Jay Peak as an intended use of investor funds, nor did Phase 1 and Phase 2 investors receive an ownership interest in Jay Peak.”
Instead, according to the lawsuit, investors in Phase 2 were told their money would be used to build Tram Haus Lodge and other parts of Phase 2, to pay developer fees, to pay contingencies, and to purchase the land.
Use of margin accounts, Treasury bills
Vermont’s suit also describes “a complex web of financial accounts” that included 100 accounts at “several different banks and securities brokerage firms and between at least 26 entities.”
The lawsuit says Stenger and Quiros instructed investors to wire or mail money into escrow accounts that Stenger controlled at People’s United Bank. Once they satisfied escrow conditions, they moved the money into various brokerage accounts that Quiros controlled at Raymond James Financial Inc., according to the lawsuit.
Fourteen of the accounts Quiros controlled at Raymond James Financial had margin features. That means they were high-risk, that the owner of the account could borrow money from the accounts to purchase securities, and that the broker of the account was legally allowed to sell the securities if it needed to, according to the lawsuit.
Four of those fourteen accounts were used, according to the lawsuit. The first two accounts, which were used to purchase Jay Peak, were consolidated into a third account in February 2009. The third margin account was closed and paid off, and the fourth account opened in February 2012.
The fourth account closed in March 2014, according to the lawsuit, paid off with $18.2 million that investors had put into the AnC Bio project — the last of the pair’s seven projects that are mentioned in the SEC filing.
Those practices were “a vehicle to move money between projects and accounts,” according to the lawsuit “served no legitimate business purpose other than to enable Quiros and Stenger in their scheme to defraud investors.”
The lawsuit says that Quiros also used investor money to purchase U.S. Treasury bills, put those bills up as collateral, and redeemed the bills once they matured. The lawsuit says those Treasury bill investments “were low-yield, short-term investments that netted less than $115,000 in income.”
“The use of margin accounts and the purchase of (Treasury bills) was never disclosed to investors for any of the projects, and placed (investor) funds at substantial risk by pledging partnership funds as collateral,” the lawsuit said.
“Stenger testified that he was ‘not familiar with any kind of margin loan account’” and that “he did not think investors funds should be used as collateral for a personal loan,” the lawsuit says.
Continued fundraising for AnC Bio
The Vermont lawsuit warns that Stenger and Quiros continue to seek investors for Q Burke and AnC Bio projects, and says they have “publicly declared their intent to raise hundreds of millions more in investor funds” for projects in the Newport area.
The lawsuit accuses Quiros and Stenger of transferring $62 million in investor money from AnC Bio Vermont to an account that Quiros controls at Raymond James Financial and has pledged as collateral for margin loans.
Another $18.2 million was used to pay off a fourth margin account before it closed in March 2014, according to the lawsuit.
Quiros also improperly used $10.7 million in AnC Bio investor money as collateral for a $15 million loan, according to the lawsuit. The loan is through Citibank, and the investor money is being held at Pershing LLC, the lawsuit says. An additional $4.2 million in AnC Bio money was used to pay taxes for Jay Construction Management, a company owned by Quiros, the lawsuit says.
Quiros used $6 million from the Citibank loan to pay personal income taxes, the lawsuit says, and $2.4 million to make income distribution payments to investors at five of the EB-5 projects described in the SEC complaint, according to the lawsuit.
The lawsuit alleges that Quiros also improperly used $2.2 million in AnC Bio investor money to buy a New York City apartment at Trump Place; and a margin account to transfer $7 million in AnC Bio investor money to buy the Burke Mountain Resort, according to the lawsuit.
“Through this series of actions, Quiros used investor funds to purchase the Burke Resort for himself, and then improperly enriched himself again at the expense of investors by selling a small portion of the Burke Resort land to investors at a significant per-acre markup that is not justified by an appraisal,” the lawsuit says.
Quiros improperly paid $7.9 million in AnC Bio investor money to North East Contract Services LLC, owned by Bill Kelly, “for construction supervision services that do not align temporally with, and far exceed, the value of payments made to contracted suppliers,” the lawsuit says.
North East Contract Services retained 32 percent of payments, even in cases where the subcontractors were not paid, and gave the remaining 68 percent of the payments “to various entities owned or controlled by Quiros at Quiros’ direction,” the lawsuit says.
About $5.5 million of the $7.9 million in AnC Bio investor money were sent to Quiros’ company, G.S.I. of Dade County, Florida. The company later purchased 25 acres of land in Newport for $3.15 million — even though it was worth $620,000 — and sold it to another related company, AnC Bio Limited Partnership, for $6 million, the lawsuit says.
Quiros made fake invoices from Jay Construction Management, another of his companies, in order to facilitate the transactions and transfer more than $47 million of AnC Bio investor funds to Jay Construction Management, according to the lawsuit.
Quiros and Stenger “falsely represented to the State of Vermont that as of March 2015, $24.5 million was sent to AnC Bio” as payment for certain expenses, and still had $21 million remaining, the lawsuit says, but they have “at most sent $8 million to AnC Bio Pharm and have nowhere near $21 million in project operating accounts.”
“As a result of the misuse and misappropriation of AnC Bio investor funds, a significant budget shortfall exists,” the lawsuit says. “The project has at least $84 million in outstanding construction work but only $41 million left in available funds and fundraising capacity.”
